Trading is easy
OK, im throwing in my two penneth.
Lots of what i am about to write here is in total opposition to many other posts, its ok i have thick skin so feel free to flame me!
So lets start by answering the question. After your initial training:
YOU SHOULD BE MAKING AN INCOME ALMOST IMMEDIATELY!
If you are not then:
STOP TRADING IMMEDIATELY!
Let me elaborate. Running a trading business (as an active trader) gives one a unique and enviable advantage to virtually all other businesses. The most glaring one is that you can paper trade. You can actually test your new found knowledge in the actual environment you will be operating in. This sounds simple but think about it. If you paper trade successfully for 3-6 months perhaps tripling or quadrupling your initial stakes, then what is going to change when you actually hit the dealing desks?...... Aside from an initial psychological transition that seems to occur for most traders when they first start to use real money. Your real trading should performance should follow paper exercises.
From experience the only thing you really gain over time is an appreciation of your investor peer groups and what effect they are having on the markets. Knowledge that some groups have large amounts of capital and invest over long periods, some have small amounts and trade over minutes or hours. Some even have large amounts over small periods. But I will say although there is advantage with this knowledge, you dont actually need it to be successful.
To be a successful trading newbie you need to get 3 very interrelated things right to guarantee success; Money management, Discipline/Psychology, A System.
Money management - Simply put you will have starting capital. Not all trades will win, in fact many successful traders I know personally lose more often then they win. But when they win typically their trades are returning 60-300% when they lose they are losing 10-20%. Paper trading teaches you the finer points of this fairly quickly. For example you will work out in a flash that putting all your capital into that "killer big win trades" will quickly see you shirtless. Controlled loss in trading is a beautiful thing, slippage is a pain in the **** that we all live with and goes with the territory. Once you understand you realise losses are just business expenses, all businesses have expenses. As a rule of thumb from the beginning I have never risked more then 10% of my total capital on any one trade. Money management is also informed by your psychology and trading system.
Discipline/Psychology - The number one killer in trading is your ego, you need to eliminate it completely before you start. Your fear will try and make you sell to early, your greed will make you sell too late, your impatience will make you take stupid trades. Your system should provide you with absolute concrete entry and exit points. i.e. BEFORE you enter a trade you will have predefined exactly at what price you will enter, what price you will leave if the trade goes against you, and what mechanism you are going to use to take profit. You can kill your ego/slay your demons by exercising discipline over your trading system. After you make your decisions your ego can kick/scream/cry/cower in the corner whatever but the rational you that made the trading choices before the risk began must prevail. I find keeping a trading journal helps. Before you make a trade write down clearly the reasons for doing so and refer back to it whenever Mr. Demon tells you to do anything. There is a good book called the disciplined trader which has lots if detail in it about this. I forget the author, i think it was published by the FT press though.
A system - This is the easy and fun bit. Whatever you might think about the markets they are actually incredibly simple. Almost anyone with a couple of brain cells to rub together can learn how they work. If you dont i recommend reading "How to read the financial pages" to get quickly up to speed. Systems abound by name but you will find that 80 of almost all of them are just different combinations of fundemental and technical analysis. Alot of them work because they are all based on the same principles. Most of them are in fact ways of imparting all the information you need (which you could get for free) and then framing them into a kind of "putting it all together" framework for building a strategy. I am not condemning them (I know people that have done rather well with them). There are more esoteric systems, and there are some bloody marvellous ones, I read somewhere on this site about Mandlebrot fractal trading!!! There are also programme trading system that trade for you while you sleep, hang out in coffee bars, walk the dog etc but to be honest most of them only operate well in a decent trend which basically mean they keep you buying when the market is moving up and keep you selling when they are going down. Recently there have been some really fantastic hedge fund collapses because the market flipped and the computers got confused. Hopefully they are all set to sell at the moment. Personally I think you cant beat decent technical and fundemental skills. And its not that hard to learn enough to build a system. I mainly trade options on equities and indices short to middle term. Heres the simple system i used 10 years ago and have been building on since:
First work out WHAT to trade.
In equities you want very highly liquid stocks with the most upside potential. In terms of working out which ones are good you can spend hours/days pouring through analysis or you could just compare them on a chart. Here's a way to find the most potentially good stocks from the thousands available in about 10 minutes. I do something (slightly more sophisticated then this) about once a month, i think you could use yahoo charts for this:
Compare the major indices i.e. FTSE 100 and 250 over a period of about 1 year and also around 6 months. Which one has moved higher? OK take the one that has moved higher and compare the sectors in the index over the same time frames and select the top 2 or 3 that have moved higher. In those sectors compare all the stocks and select the top 3 that have moved higher. You now have a list of between 6 to 9 stocks that are of most interest to the investors that have done all that research for you. The likely hood is these stocks experience the highest volume of trades. As active traders we LOVE highly liquid stocks.
Then work out HOW to trade, heres a basic minimal syllabus you need to know before you start.
> Yields - Yields paint a picture and to be honest one can trade on this one piece of fundamental knowledge successfully, i did for years. When the yield of an index or equity is low (less then about 2.8 to 3%) the community believe that the equity is going to value up in the future. Why else would you buy a relatively risky investment at 3%! If the yield is high (4-5%+) the reverse is true. Looking at some stocks in the FTSE 100 at the moment yields are running as high as 10-20% (mainly financials) what a fantastic investment!!?? Do the community actually think the dividend will pay that or will the yield be adjusted down? At the moment the yield is confirming a bear trend.
Technicals (in order of importance)
> Price action, trend lines, support and resistance levels - Learn how trend lines work and how to apply them long, medium and short term. These will help you identify the prevailing trend. There are two main types of trendline supply and demand trendlines. NEVER bet in the opposite direction of the trend (see my signature). Contrarian trading is fickle/difficult. Dont do it. Know where intrinsic support and resistance levels are. Trade when prices are closest to main support/resistance and trendlines. You will notice that volume increases on this important areas becuase that is also when most other people are trading.
> Volume - Next most import element after price action and trendlines. Volume tells you how much SENTIMENT there is for the current trend as volume for a trend wanes all too often the trend will reverse as the previaling team (bulls or bears) runs out of allies. As the team take their profits the price action will reverse.
>Indicators, oscillators and chart patterns - these are third in the list and really just inform the other two to help you arrive at trading decision. Personally I would never trade on these in isolation. There are about 10 useful chart patterns, favourites are double/triple tops/bottoms and head and shoulders patterns, these are powerful reversal patterns. The rest are not so accurate and usually confirm the current price action such as triangles, wedges and pendants. Dont get to wrapped up in these. There is an oscillator and indicator for every day of the year like the RSI, stochastic, and momentum indicators, they literally run into hundreds. I have invented a few of my own. Most modern software comes with 20-30 built in. In reality these are just different views on the price action. I use 3: RSI, Momentum, and MACD. RSI gives off pretty good reversal signals when negative divergence occurs (peaks and troughs start moving in the opposite direction to the price action). Momentum is pretty good a s an early warnign reversal in sentiment and fires just before RSI...usually. you should have MACD cos everyone else has and many people including inst investors make BIG trading decisions on it so you need to know when they do.
Placing the trade (use with pragmatism)
Assuming you agree that trends exist, as above, then you need to find a good entry point. A trend is comprised of a series of either rising or falling peaks and troughs. Confirmation of the trend is given when a new high or low is breached.
Draw your trendlines and decide what term you are investing over. If you are medium term then you probably want to base your trade on around 6 months (be pragmatic). When the price action gets close to your trendline consider moving in. Look at volume and indicators to fine tune your entry point. Set your stop just outside the trendline, this is your LOSS exit point. When this point is reached and breached your going to exist. Take a view of when you are going to exit, are you in it for one leg of a peak or trough or are you going to ride you multiple ones to the very bottom of the the trend. This is your PROFIT exit point.
Place your trade (not using more then 10% of your capital) and whatever happens exercise you entry and exit strategy and ignore the little demon dudes. At the end of this process you will make a gain or a loss.
OK, thats it, simple i know but something like this should form the basis of a manual trading system, but practised and developed on and used affectively it will beat most programme systems hands down.
Just a note on duration of trades. This might be an unpopular view but I would would not recommend day trading to a newbie EVER. If you want to to sit and stare at a flashing screen all day make lots of trading decisions, monitoring lots of devices and instruments then fine, but day trading just teaches newbies how to over trade. The techniques above are in fact fractal (just like price action itself) and should work over most time frames. I mostly trade over periods lasting a week to a few months now. I do most fundamental analysis once a month for about 3 hours on a Sunday morning with a nice cup of coffee, and spend 30 minutes a day reviewing my positions. I take good consistent profits for little more than a part time job. I'm almost getting to the stage where I can live off it. I dont know anyone that does that day trading except a friend that works for proprietary trading house and he has every tool in the book and spreads tighter then a nats **** that you dont have. He does well which is good, cos hes going to have to pay for a new heart...
Wow, that was longer then expected it to be. Happy trading anyway newbie dudes. I hope you do well in your new career. BTW I havent proof read this so if it doesn't make sense I apologies in advance. Feel free to comment message me off the thread to clarify anything.
rm
